Quantitative Marketing Analysis

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1 Quantitative Marketing Analysis CLASS Revenue (sales) Income Statement Sections 5 Expenses Cost of goods sold (FC and VC) Operating expenses (generally FC) Profit 1

2 EXHIBIT 2.4: PRO FORMA INCOME STATEMENT FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2006 Proforma Income Statement 6 Sales $1,000,000 Cost of goods sold $500,000 Gross margin $500,000 Marketing expenses Sales expenses $170,000 Advertising expenses $90,000 Freight or delivery expenses $40,000 $300,000 General and administrative expenses Administrative salaries $120,000 Depreciation on buildings/equipment $20,000 Interest expense $5,000 Property taxes and insurance $5,000 Other administrative expenses $5,000 $155,000 Net profit before (income) taxes $45,000 7 Variable and Fixed 2

3 Variable and Fixed 8 Variable Fixed Variable/ Fixed Cost of Goods Sold Other Variable Programmed Committed Selling Expenses Materials Overhead Advertising Rent Salary Labor Sales Commissions Sales Promotion Administrative/ Clerical Commission/ Bonus Others Discounts Others Variable Fluctuate depending on product produced and sold Variable costs per unit are assumed to be constant 9 3

4 Cost of Goods Sold Categories of Variable Materials, labor, and factory overhead tied directly to production 10 Other Variable Variable expenses not tied to production but with volume, such as sales commissions, discounts, etc. Fixed that remain at a given level regardless of the amount of product produced and sold 11 On a per unit basis, decrease as the number of units over which they are allocated increase Remain unchanged regardless of the number of units produced 4

5 Programmed costs Categories of Fixed Remain unchanged regardless of the number of units produced Advertising, sales promotion, sales force salaries 12 Committed costs Those costs that maintain the organization, such as rent, administrative/clerical salaries, etc. Relevant and Sunk Relevant costs are expected to occur in the future Differ among marketing alternatives considered Includes opportunity costs 13 Sunk costs are past expenditures Typically they are irrelevant Past R&D, test marketing, and advertising 5

6 14 Gross margin Trade margin Net margin Margins Margin Definition 15 The difference between the selling price and the cost of a product Expressed in dollar terms or a percentage Gross margin Trade margin Profit margin 6

7 Gross Profit ($) and Margin (%) 16 Total Gross Margin Dollar Amount Percentage Net sales $ % Cost of goods sold -$40-40% Gross profit margin $60 60% Gross Margin sales price $ % cost of goods sold -$ % gross profit margin $ % Trade Profit (Margin) 17 Marketing Channel Cost of Goods Sold Selling Price Margin as a % of Selling Price Manufacturer $2.00 $ % W holesaler $2.88 $ % Retailer $3.60 $ % Consumer $6.00 7

8 Net Profit (Margin) 18 Dollar Amount Percentage Net sales $100, % Cost of goods sold -$30,000-30% Gross profit margin $70,000 70% Selling expenses -$20,000-20% Fixed expenses -$40,000-40% Net profit margin $10,000 10% Net profit margin is the remainder after cost of goods sold, other variable costs, and fixed costs have been subtracted from sales revenue. In this example, it is earnings before taxes, sometimes referred to as operating income (margin). 19 Contribution margin contribution Contribution Analysis 8

9 Contribution Margins The difference between total sales revenue and total variable costs Or on a per unit basis, is the difference between unit selling price and unit variable cost Is used to analyze the relationship between costs, prices, volume, and profit 20 BREAK-EVEN Breakeven ANALYSIS Analysis Breakeven analysis identifies the unit or dollar sales volume at which an organization neither makes a profit nor incurs a loss. 21 Total Revenue Total Variable = + Total Fixed 9

10 Breakeven Formula 22 Total Fixed Break-Even = Selling Price Variable Denominator = contribution per unit Price = $5 Variable = $2 Fixed = $30,000 Breakeven Example (s) 23 Break-Even = $30,000 $5 $2 = 10,000 units 10

11 Price = $5 Variable = $2 Fixed = $30,000 Breakeven Example (Dollars) 24 Dollar Break-Even = Selling Price Break-Even Dollar Break-Even = $5 10,000 units = $50,000 Contribution Margin Formula 25 Selling Price Variable Contribution Margin = Selling Price 11

12 Price = $5 Variable = $2 Contribution Margin Example 26 Contribution Margin $5 $2 = = 60% $5 Dollar Break-Even = Total Fixed Contribution Margin = $30, = $50, Wes Martz

13 Sensitivity Analysis 28 Break-even points can change if there are changes in selling price, variable costs, and/or fixed costs. Selling Price (P) Variable (UVC) Total Fixed (FC) Contribution Per CU = (P - UVC) Break-Even (FC / CU) Dollar Break-Even (FC / CM*) Scenario #1 $5.00 $2.00 $40,000 $ ,333 units $66,667 Scenario #2 $4.00 $2.00 $30,000 $ ,000 units $60,000 Scenario #3 $5.00 $1.50 $30,000 $3.50 8,571 units $42,857 Contribution Analysis and Profit Impact 29 To incorporate a profit goal in the break-even formula, treat it as an additional fixed cost. to Achieve Profit Goal = Total Fixed + Contribution Per Dollar Profit Goal 13

14 Other Uses of Contribution Analysis A manager can assess the feasibility of a venture by comparing the break even volume with market size and market capture percentage. Example: Market potential is 100,000 units and unit volume break even point is 50,000 units. Therefore, a firm s product or service needs a 50% market share to break even. Marketing implication: Can such a percentage can be achieved? 30 Product Cannibalization 31 Cannibalization occurs when a firm obtains sales revenue by diverting sales from one offering to another. Brand X: Existing Opaque White Toothpaste Brand Y: New Gel Toothpaste price $1.00 $1.10 variable cost $0.20 $0.40 contribution $0.80 $

15 Cannibalization Effect 32 Brand X Brand Y (New) Brand X expected sales before Brand Y intro 1,000,000 Brand Y expected sales Brand X units sales diverted to Brand Y Brand X per unit sales loss for each Brand Y unit sold 500,000 $0.10 1,000,000 Brand Y per unit sales gain $0.70 How will the intro of Brand Y affect the total contribution dollars of Brand X? Brand X total contribution lost? ($0.10/unit lost 500,000 cannibalized units from Brand X to Brand Y = $50,000) Brand Y total contribution gained? ($0.70 unit contribution 500,000 units of Brand Y = + $350,000) Cannibalization Effect on Contribution Dollars 33 Brand X: Existing Opaque White Toothpaste 500,000 Contribution $0.80 Contribution Dollars $400,000 Brand Y: New Gel Toothpaste Cannibalized volume 500,000 $0.70 $350,000 Incremental volume 500,000 $0.70 $350,000 Subtotal 1,500,000 $1,100,000 Less: Original forecast volume for Brand X existing opaque white toothpaste Total 1,000, ,000 $0.80 $800,000 + $300,000 15

16 34 Operating Leverage Operating Leverage The extent to which fixed costs and variable costs are used in the production and marketing of products High operating leverage High total fixed costs relative to total variable costs Low operating leverage Low total fixed costs relative to total variable costs The higher the operating leverage, the faster total profits will rise or fall once sales volume rises or falls below break even volume

17 Effect of Operating Leverage on Profit Base Case 10% Increase in Sales 10% Decrease in Sales High Fixed Cost Firm High Variable Cost Firm High Fixed Cost Firm High Variable Cost Firm High Fixed Cost Firm High Variable Cost Firm Sales $100,000 $100,000 $110,000 $110,000 $90,000 $90,000 Variable $20,000 $80,000 $22,000 $88,000 $18,000 $72,000 Fixed $80,000 $20,000 $80,000 $20,000 $80,000 $20,000 Profit $0 $0 $8,000 $2,000 ($8,000) ($2,000) 17

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